Pension sharing on divorce/dissolution in England and Wales

Together with property, pensions are one of the most valuable assets that you and your spouse will own. The Office of National Statistics reported in 2022 that 42% of the wealth held by households in Great Britain is held in pensions.

Almost half of marriages unfortunately now end in divorce.

• In 2021, there were 113,505 divorces granted in England and Wales.
• Despite this, information obtained from a Freedom of Information request shows that the number of applications for pension sharing orders, which instruct pension providers to divide the value of a pension fund between parties, fell by 35 per cent since 2017, from 36,202 to 23,622 in 2021.

That means that only 1 in 5 divorcing couples considered steps to share pensions on divorce. Pensions are often one of our most valuable assets, so it’s important to take care when agreeing to share your pension entitlements on divorce.

How are pensions split in a divorce? 

Every pension that you and your spouse has will be valued, regardless of whether part of that pension was accrued before the relationship or marriage. That value will then be looked at together with other assets such as property and savings and there may be apportionment arguments – see below.

Although the usual starting point for asset division is sharing, and so an equal split of the assets between you, there are many reasons why this may not be fair or appropriate. Each divorce settlement is different, and how pensions are treated will vary from case to case. For example, you may wish to retain a property rather than receive a share of your spouse’s pension.

Why is it important to seek legal advice for pensions on a divorce?

How the pensions are distributed will differ in each case, depending on the individual circumstances. No two cases are the same.

Pensions can be dealt with in one of three ways:

1. Pension sharing
2. Pension attachment
3. Offsetting

What is a pension sharing order?

A principle of sharing (often equally) is the starting point for many divorces. Therefore, it is important to be aware that pensions are one of the assets that can be shared and the court has the power to make orders doing exactly that. Although the pension will still not be payable any earlier than the scheme rules allow, it is still available for sharing immediately.

Pension sharing is when a share of one spouse’s pension is transferred to the other spouse at the conclusion of the financial proceedings.

Pension Sharing Orders in England and Wales 

Pension sharing is handled differently in Scotland. For more information, see our article on the differences in pension sharing in England & Wales and Scotland.

What is a pension attachment order?

Pension attachment ‘earmarks’ the pension benefits for the benefit of the other spouse in the future. This is no longer a popular option for a number of reasons, including the fact that one spouse must wait for their ex-spouse to retire or choose to start taking benefits before they can share in them. If they take their benefits early, then the benefits would reduce for the receiving spouse.

What is pension offsetting?

This is the term used to describe taking other assets instead of a pension share. This situation commonly occurs when one person wishes to retain a house and the other wishes to retain their pension.

The values of each are worked out so that they can ‘offset’ each other. It is possible to do a partial offset if the values aren’t equivalent.

It is important to consider this option carefully as the value of the pension provided by the scheme may not reflect the true value of the pension benefits to the parties.

Some also overestimate their ability to build their pension investments post-divorce or dissolution.

What is the value of our pensions?

All pensions have what is known as a cash equivalent value (CEV or CETV). This tells you what the fund is worth in cash terms. However, in many cases, that value is overly simplistic as it does not look at the benefits that are attached to different pension funds.

To find out the true value, your family solicitor will instruct an actuary who is qualified to compare and value different pension assets. They will explain the best way of sharing different pensions to ensure that you are not losing out.

Do I need a pension actuary?

The usual answer is yes if combined pensions are valued at more than £100,000 the reason being that actuaries are qualified to value your pension both in terms of its equivalent cash value, but also to look at the value of the benefits associated with it.

There are many different types of pensions, some having a defined benefit and some based on the contributions made to the pension fund.

The actuary will be able to compare and contrast different types of pension and provide calculations for pension sharing and offsetting.

Do I need to wait for my spouse to retire before I can receive the pension share?

No. Once the pension has been shared, each person’s pension pot is separate to them. Some pension companies allow you to keep the money in their scheme but some do not and it is always important to take independent financial advice on the options that might be available to you. In the case of the latter, you would need to identify a pension fund for the money to be transferred into with help from an IFA. You can then draw down on your pension when you are ready in accordance with the scheme rules. You do not need the agreement of your former spouse.

Is the state pension shared?

No, it is not possible to share this. However, it is vital to get a forecast of what your state pension will pay you as any missed contributions may affect how much you get. For example, if one of you has had a career break to have children then their state pension may be reduced. The actuary will be able to calculate what is needed from other pensions to top this up if this option is available, or to help assess what might be required to compensate one party for lost years.

Is the pension accrued before you married included?

This is called apportionment and can be a complex issue where legal advice is critical.

In very simplistic terms, the court will start by looking at the total pension value.

If one party had significant pre-marital pension then there may be some scope to argue that this part of the pension should be ringfenced, i.e. not shared between the parties on divorce/dissolution.

However, that depends on what resources the other person has available and what they will need in retirement. If pension is ‘needed’, a court is unlikely to be persuaded by an apportionment argument.

The court may also look at factors such as the length of the marriage (including any pre-marital cohabitation).

Can a prenuptial or postnuptial agreement protect my pension?

Any pension accrued before the marriage is capable of acquiring some protection by entering into a pre or post nup and providing for some or all of it to be ringfenced and so excluded from a settlement. However this cannot be guaranteed as a nuptial agreement is not capable of binding the family court.

The court will look at all of the circumstances, including the terms of the pre or post nup, before making a decision as to what is fair and reasonable. You should ensure that your pre or post nup is reviewed regularly and that reasonable financial provision is being made to the other party such that any reason to depart from the pre or post nup is reduced.

Why is it important to seek financial advice?

Seeking financial advice is equally important when considering a pension share. Your solicitor will often liaise with your financial adviser when considering with you outcomes and preparing offers. Financial advisers help with planning for your retirement, and seeking their advice from the outset could help with presenting your case and provide you with reassurance as to funds available for your retirement.

Financial advisers provide an important role for the spouse with the pension debit (the person whose pension is being reduced) and equally for the spouse with the pension credit (the person who will be receiving a pension share).

The spouse with the pension debit will require financial advice regarding the impact the debit will have on their pensions and what they can do to help improve their pension benefits or income in the future.

The spouse with the pension credit will need advice on whether they would benefit better from an internal or external pension share (if available) and, if external, where would be the best place.

Financial advisers can also help on many other aspects of settlement, such as tax, cashflow modelling and savings and investments in cases where one spouse is likely to receive a large lump sum.

If you do not already have a financial adviser, your lawyer is able to help you find the right financial adviser for you.

Top tips — pension sharing on divorce/dissolution

Our top tips are:

1. Undertake a comprehensive gathering of information at the outset, as it can take a long time to receive information back from some pension schemes. Use Form P to obtain details in relation to any pension scheme of which someone is a member. Care should be taken to ensure that aspects of pension entitlements which may not be immediately obvious are identified, for example death benefits, guaranteed annuities and various other potentially complicating features.
2. Do not overlook state pension entitlements, including state pension, additional state pension, and the CE valuation of additional state pension or protected payment. Details of your state pension entitlements can be obtained by completing an online request of the DWP in Forms BR19 and BR20 – remember to request that the other party does the same.
3. It is possible to search for lost pensions if you are not sure what pensions you may hold.
4. If commissioning a pension report, ensure that your instructions to the Pension on Divorce Expert (‘PODE’) are as detailed as possible. In sharing cases, where apportionment may be appropriate, give the PODE clear instructions on whether the calculation is to be based on the deferred pension method, the CE, or a straight line.
5. You should also ensure the PODE is made aware of any serious health conditions. Substantially impaired life expectancy should be reflected in a PODE’s calculations, but minor health conditions or those amenable to change should not normally be so.
6. Take special care when completing the Pension Sharing Annex, particularly with scheme names and remember when completing Form D81 that the Regulation 410 information is required. Send a draft Annex to the pension provider in advance for approval in principle.
7. The Pension Sharing Order (‘PSO’) must provide for sharing of a percentage of the pension, not a fixed amount, and you will need to agree on who will pay any charges arising from the transfer.
8. A PSO only comes into effect on the later of the granting of a Final Order of divorce or 28 days from the date of the PSO. Consider carefully whether to delay applying for a Final Order (formerly known as Decree Absolute) until 28 days from the date of the PSO. If a Final Order is granted beforehand, a party may lose out in pension terms if their spouse dies after the Final Order has been granted and before the PSO can take effect. See our article on the differences between a Conditional Order and a Final Order for more information.
9. However, note that a PSO will be implemented by the pension provider after that date. They have a four month window to do so.
10. PSOs are not available on variation applications that relate to divorce petitions issued before 1 December 2000. In addition, as a general rule, a PSO cannot be made twice against the same pension from the same marriage. However, on a capitalisation application, a PSO might arguably be made against the same pension from the same marriage which has previously been subject to a PSO.

Pensions are a complex area and you should always consult a specialist family lawyer before entering into an agreement to share part of your pension.